Notes: Economics in One Lesson by Henry Hazlitt, chs.

19-20

Description: Unions are only good for the economy if they are not backed by government force.
Wages are fair when they reflect supply and demand.

Previous chapter: Fixing prices NEVER works… and this includes when it takes the form of
minimum wages!

CHAPTER 19: DO UNIONS REALLY RAISE WAGES?

Power of labor unions to raise wages over long run for entire working pop very exaggerated
- Bc of failure to recognize that wages are determined by labor productivity

Doesn't meant that unions don’t/can’t serve useful function

- In free market, unions assure that all members get true market value of their cervices
- Theoretically the legitimate function of unions is detailed in the following passage:
o “For the competition of workers for jobs, and of employers for workers, does
not work perfectly. Neither individual workers nor indi- vidual employers are
likely to be fully informed concerning the condi- tions of the labor market. An
individual worker, without the help of a union or a knowledge of “union rates,”
may not know the true market value of his services to an employer. And he is,
individually, in a much weaker bargaining position. Mistakes of judgment are far
more costly to him than to an employer. If an employer mistakenly refuses to
hire a man from whose services he might have profited, he merely loses the net
profit he might have made from employing that one man; and he may employ a
hundred or a thousand men. But if a worker mistakenly refuses a job in the belief
that he can easily get another that will pay him more, the error may cost him
dearly. His whole means of liveli- hood is involved. Not only may he fail
promptly to find another job offering more; he may fail for a time to find
another job offering remotely as much. And time may be the essence of his
problem, because he and his family must eat. So he may be tempted to take a
wage that he knows to be below his “real worth” rather than face these risks.
When an employer’s workers deal with him as a body, however, and set a known
“standard wage” for a given class of work, they may help to equalize bargaining
power and the risks involved in mistakes.”
- Experience shows that unions have gone beyond their legit functions, with the help of
legislation and other one-sided govt tactics, to put compulsions on employers
o They seek to fix wages above the real market worth
 Always brings about unemployment
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 Can only work with intimidation and coercion

o One way of doing this: restrict membership into union on basis other than
competence or skill
 Can be done thru excessive initiation fees, arbitrary qualifications,
discrimination, limitation on number of members, etc.
 Most obvious case of using intimidation is in strikes
 Peaceful strikes can be legitimate if peaceful
o Strikes may bring an underpaying employer to his senses
o He may find he is unable to replace the striking workers
with equally good workers and those willing to accept the
same wage
o But, when intimidation or violence is sued to enforce
demands, the strike becomes questionable
o If they use picketline to prevent new workers from filling
their void, means that they are being paid above the
market wage to begin with
o New workers are willing to be paid the going rate
o Proves that the other alternatives open to the new
workers are not as good as those that the old employees
have refused
o The strikers then are in position of privilege, and are
using force to maintain this privilege against other
workers
 Thus, the hatred of the “scab” looking for honest work is
unjustified

Is labor generally being “underpaid?”

- Emotional economics says always too low
- Not true: in fact, if a union is able, by using coercion, to force a wage above the real
market value of their services, it will hurt all other workers as it hurts other members of
the community

Is an increase in wages gained at the expense of the profits of the employers?

- Maybe in the short run or in special circumstances
- If wages are forced up in one firm in a way in which the firm can’t compensate by raising
prices (because of competition with other firms), the increase will come out of its profits
o Much less likely to happen if the wage increase occurs throughout the whole
industry
- The industry will raise prices and pass wage increase on to the consumers
o Most of these consumers are workers, thus their real wages are reduced by
having to pay more for a partic product
o Sales may drop off as result of the increased prices, and profits will be reduced
 And employment will be reduced as well correspondingly
- It’s possible that industry profits could drop without corresponding unemployment,
which would mean that an increase in wages means and increase in overall payrolls and
the whole cost comes out of profits
o This situation is not likely, but conceivable
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o Example:
 Railroads can’t always pass increased wages on to the consumer through
higher prices bc the govt won’t permit
 It is at least possible for unions to gain in the short run at the expense of
employers and investors
 Investors once had liquid funds, meaning easily made into cash
o They put them into the RR business
o Could have put them into any number of industries or
firms, but now that capital is trapped in one partic form
o RR unions may force the investors to accept smaller
returns on this capital already invested
o Will pay the investors to cont running the RR if they can
earn anything at all above the operating expenses, even if
miniscule return on their investment
o If the money they invested, however, yields less than they
can invest in other lines of biz, the investors will not put
any more money into RRs
 May replace a few worn out parts
o “If capital invested at home pays them less than that
invested abroad, they will invest abroad. If they cannot
find sufficient return anywhere to compensate them for
their risk, they will cease to invest at all.”
o Thus, the exploitation of capital by labor can only be temporary
 Must quickly come to an end
 It will force the marginal firms out of business entirely, unemployment
will occur, and wages and profits will readjust to where employment and
production will reappear
 This unemployment and reduced production makes everybody
poorer
 Labor may temporarily have a greater relative share of national
income, but national income will fall absolutely
o Labor’s relative gains are a mirage.
 Only getting a lower total amount in terms of real
purchasing power
 “Thus we are driven to the conclusion that
unions, though they may for a time be able to
secure an increase in money wages for their mem-
bers, partly at the expense of employers and more
at the expense of nonunionized workers, do not,
in the long run and for the whole body of
workers, increase real wages at all.”
- Fallacy: post hoc ergo propter hoc… confusing causation with sequence
o Many people see rise in wages in early 20th c as result of growth of unions rather
than growth of capital investment and sci/tech advance
- Another fallacy: looking at one and not the whole
o Thinking about only gains made by union demands in short run for partic group
and not tracing effects on employment, production, living costs of all workers
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Have unions in the long run prevented real wages from rising to what they otherwise might have?
- They have definitely been a force holding down real wages by reducing labor
productivity

Some good for unions: in some trades, made standards to increase level of skill and competence
- Where labor was plentiful, indiv workers could gain by working workers long hours cuz
they could be easily replaced
- Some would even reduce own profits by overworking employees
- Unions demanded decent standards for health and welfare of workers and raised real
wages
- But, Hazlitt says:
o in recent years, as their power has grown, and as much misdi- rected public
sympathy has led to a tolerance or endorsement of anti- social practices, unions
have gone beyond their legitimate goals. It was a gain, not only to health and
welfare, but even in the long run to pro- duction, to reduce a seventy-hour week
to a sixty-hour week. It was a gain to health and leisure to reduce a sixty-hour
week to a forty-eight- hour week. It was a gain to leisure, but not necessarily to
production and income, to reduce a forty-eight-hour week to a forty-four-hour
week. The value to health and leisure of reducing the working week to forty
hours is much less, the reduction in output and income more clear. But the
unions now talk, and often enforce, thirty-five- and thirty-hour weeks, and deny
that these can or should reduce output or income.
- Many unions insisted on rigid subdivisions of labor
o Raise production costs
o Expensive jurisdictional disputes
o Opposed payment on basis of output of efficiency, insist on same hourly rates
for all members regardless of differences in productivity
o Insist on promotion through seniority rather than merit
o Initiated deliberate slowdowns to fight “speedups”
o Denounced men who turned out more work than their fellows
o Opposed machinery
o Insist on make work rules that require more men and time to do the same work

Union policies, then, have in the long run been to reduce real wages for all groups… in terms of
goods they will buy
- The case of increases in real wages come through accumulation of capital and tech
advances

CHAPTER 20: “ENOUGH TO BUY BACK THE PRODUCT”

“just” prices and “just” wages: social justice and “living wage”
- Classical economists formulated a dif concept though
o Functional prices and functional wages
 “Functional prices are those that encourage the largest volume of
production and the largest volume of sales. Functional wages are those
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that tend to bring about the highest volume of employment and the
largest payroll.”
- The concept has been taken over by the Marxists and the purchasing-power school
o They question whether existing wages will work
 The only wages that will work are those that will enable labor to “buy
back the product it creates”
 Marxists and purchasing power schools attribute economic depressions
to a failure to pay these wages
o Union leaders use these arguments to gain support

How do we know when labor has enough to buy the product back? When does it have more than
enough? How do we determine what the right sum is?

Should the workers in each industry receive enough to buy back the partic product they make?
- What about workers who make mink coats? Cadillacs?

First half of 20c, unions wanted 30 percent increase in wages

- Were already receiving 20 perc more than avg factory pay
o Already in top 1/3 of income receivers
- Wanted to “bolster our fast-shrinking ability to absorb the goods which we have the
capacity to produce”
- Should then the avg factory worker need a 55% increase as well to be able to buy back
the product?

The “enough to buy back the product” argument is just a special form of the general “purchasing
power” argument
- In an exchange economy, every person’s income is someone else’s cost
- Every increase in hourly wages, unless brought about by an equal amount productivity, is
an increase in the costs of production
- An increase in the costs of production, where the govt controls prices and forbids price
increases, takes profit from firms… affects marginal producers moreso
o Forces them out of business
o Shrink production
o Growth in unemployment
- If firms can increase prices, a higher price discourages buyers, shrinks the market, leads
to unemployment
- “if a 30 perc increase in hourly wages all around the circle forces a 30 percent increase in
prices, labor can buy no more of the product than it could at the beginning.”

Many will say that the increase in prices wont be as great as the raise in wages
- true: it can only follow in the long run
o if not in prices… the lack of a rise in prices will be as a result of increased
unemployment
- probable that total payrolls in dollar amount and in real purchasing power will be lower
than before
o drop in employment as a result of union policy and not from tech advance
means that fewer goods are being produced for everyone
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the belief that prices increases would be less than wage increases is a result of the fallacy of looking
only at direct labor costs of a partic firm or industry and assuming these to represent all the labor
costs involved:
- “…this is the elementary error of mistaking a part for the whole. Each “industry”
represents not only just one section of the productive process considered “hor-
izontally,” but just one section of that process considered “vertically.” Thus the direct
labor cost of making automobiles in the automobile factories themselves may be less
than a third, say, of the total costs; and this may lead the incautious to conclude that a 30
percent increase in wages would lead to only a 10 percent increase, or less, in automo-
bile prices. But this would be to overlook the indirect wage costs in the raw materials and
purchased parts, in transportation charges, in new factories or new machine tools, or in
the dealers’ markup.”

Equilibrium:
- equilibrium wages and prices are those that equalize supply and demand
- if govt or private coercion tries to lift prices above this equilibrium level, demand is
reduced, and production is reduced
- if there’s an attempt to push prices below their equilibrium level, profits will diminish,
supply will fall, and production falls
- the best prices, then, are the prices that encourage the largest volume of production and
largest volume of sales
- the best wage rates are those that permit full production, full employment, and sustained
payrolls
o the best profits, then are those that encourage most people to become employers
or provide more employment than before
“If we try to run the economy for the benefit of a single group or class, we shall injure or destroy all
groups, including the members of the very class for whose benefit we have been trying to run it. We
must run the economy for everybody.”

Key points:
- Unions can serve a useful function in market economy by raising wages to their market value, if
they are somehow being suppressed below
- Mostly, however, they use force to place workers in a privileged position above the market wage,
preventing workers from filling their roles as productive laborers
- The best prices, whether in the form of consumer goods prices or wage rates, are those that
enable the fullest production, employment, and profits; namely, the equilibrium price where
supply meets demand.